MSM’s 1Q15 earnings were within expectations. Maintain BUY with a higher TP of MYR6.10 (from MYR5.75, 13% upside) after rolling forwardour valuation to 2016. We continue to be positive on this company as we expect low raw sugar prices to further improve its margins going forward. We believe its decent dividend yields of 4. 3-4.5% could also provide some support to its share price.

• Within estimates. MSM Malaysia’s (MSM) 1Q15 net profit was in line, making up 26.3% and 25.6% of our and consensus estimates respectively. 1Q15 sales and net profit increased by 2.1% and 26.1% YoY respectively. Better topline was driven mainly by stronger industrial sales. Profitability has improved, with its EBIT margin coming in stronger at 17.4% vs 14% in 1Q14, mainly due to lower raw sugar cost. All in, its 1Q15 core earnings expanded to MYR71.0m.
• Key briefing highlights. These are: i) total sales volume in 1Q15 grew 5.9% YoY – it continues to be driven by stronger industrial sales (+47.8% YoY), ii) low raw sugar prices likely to continue improving its margins moving forward, as MSM purchased all of its FY15 and 40% of its FY16 raw sugar requirements at the current low price (raw sugar prices are currently trending at USD0.12-0.13/lb, iii) management is optimistic that the Government will soon resolve the sugar import permit issue while – at the same time – continues to be hopeful for a concrete solution to the Thailand smuggling issues, and iv) the companycontinues to look for opportunities to expand its business overseas.
• Forecasts and risks. No changes to our FY15 earnings forecasts due tothe in-line numbers. However, we trim our FY16/FY17 EPS forecasts by 7.4%/4.4% respectively, after adjusting for lower domestic and export sales volume. Key risks to our recommendation include: i) further slowdown in domestic sugar demand, ii) a spike in raw sugar prices, and iii) further weakening of the MYR vs the USD.
• Maintain BUY. We lift our TP to MYR6.10 (from MYR5.75), after rolling forward our valuation targets to 2016 (from 2015) and applying an unchanged target P/E of 15x, which is well-within its historical 3-year P/E band range of 13-17x. We continue to be positive on MSM, as we believe the current low raw sugar prices would bode well for its margins. We view the company’s dividend yield as relatively decent as well at 4.3-4.5% for FY15-17. Maintain BUY.

Key briefing highlights Sales volume in 1Q15. MSM recorded total sales volume increase of 5.9% YoY in 1Q15, with industrial sales volume remaining as the key driver – the segment saw a stronger sales volume of 47.8% YoY. However, this was partly offset by lower domestic (-16.2% YoY) and export sales (-7.7% YoY). Management again clarified that this was partly due to some reclassification of MSM’s customers from domestic to industrial, as some of its wholesalers have grown and are now classified under the higher category. In view of that, we have tweaked our forecasts to reflect the slower growth in domestic and export sales volumes.

On a side note, management also mentioned that MSM’s sales were not affected by the implementation of the goods and services tax (GST).Low raw sugar prices to improve its margins. We continue to expect that MSM’s earnings growth in FY15 and FY16 will be largely driven by the low raw sugar prices. The company indicated that it has purchased all of its raw sugar requirements forFY15 and approximately 40% for FY16 at lower prices (as per the current trend), but did not disclose the pricing. Raw sugar is currently priced at USD0.124/lb. Management believes that the price of raw sugar has reached a stable level currently and expects it to rebound from as early as next year. Thus, we view its strategy to buy forward some of its FY16 raw sugar requirements positively, as it could protectits margins over the medium term.

We are currently maintaining our conservative raw sugar cost assumptions atUSD0.166/lb and USD0.174/lb for FY15 and FY16 respectively. Updates on import permits and smuggling issues. Management remainsoptimistic that the Government will soon resolve the sugar import permit issue by considering its proposal for a stop on the issuance of new approved permits (APs). Meanwhile, on the issue of smuggled Thai sugar into Malaysia, management seesthat it is still prevalent, given that this problem is difficult to resolve. Other updates. Management has also said that it is currently looking at potential opportunities to expand its business overseas, as it looks to increase its revenue streams.